About Currency Currents

With Currency Currents, you can stay tuned-in to our current global-macro view and our analysis of key investment themes driving currency prices.

We consistently focus on the key asset classes responsible for the flow of global capital -- including equities, fixed income, commodities and, of course, currencies.

Nothing is off limits to us in this free-wheeling look at the markets. Some days you’ll receive ramblings on trading psychology, while other days we may take an academic approach in explaining esoteric economic issues. Ultimately we have one goal in mind: to help you get a handle on the key investment themes driving global capital flow. Because if you know where the money is going, it increases the probability that your position in the market will be a profitable one.

Who is Jack the Pipper?

Jack is founder and president of Black Swan Capital LLC. He has also
operated a discretionary money management firm specializing in global
stock, bond, and currency asset management for retail clients. In
addition, he was general partner in a firm specializing in currency
futures and commodities trading. Neither firm is now in operation.

Prior to entering the investment arena, Jack worked in various
corporate finance positions. He has written extensively on the subject
of global currencies and international economics.

Adopting an austerity budget in Ireland — that was the reason for the see-sawing euro yesterday.

The Irish government detailed the toughest budget on record on Tuesday, targeting 6 billion euros in spending cuts and tax hikes, and warning passage was crucial to avert a deeper crisis and free up EU and IMF rescue funds. In a speech to parliament, Irish Finance Minister Brian Lenihan sketched out austerity measures for 2011 including cuts to child benefit and public sector pensions, but stuck with growth forecasts that some economists — and even the European Commission — believe are too optimistic. (Reuters)

The euro liked seeing Ireland make some effort, but then traders thought about it a bit. “Toughest budget on record?” How exactly might this impact the growth differential between eurozone and US? A bit ugly-looking for eurozone, to say the least.

But in the US it is a different story. Second thoughts on austerity and all of a sudden we’re looking at some additional stimulus with the advent of unemployment benefit and tax cut extensions.

Add some more economic stimuli in the US and voila — the near-term growth differential advantage shifts further. Advantage: United States. Recently it has been estimated that the original stimulus, aptly named the American Recovery and Reinvestment Act, has been a significant driver of growth in the US. The Congressional Budget Office’s latest report puts stimulus-driven growth at somewhere between 1.4% and 4.1%.

Yes, I also thought that was a rather wide estimate. But maybe these two charts from the Center on Budget and Policy Reforms will help get the point across:

“Obama’s tax-cut compromise with Republicans was greeted with anger from fellow Democrats, but many seemed resigned to accepting it as the best deal they could get and a step toward reviving the economy.”

Our emphasis above. Frankly, that’s exactly how the President sold this “compromise.” Which reminds me of a quote I read or heard somewhere a while back; to paraphrase: if the two-party system reaches a compromise, the American people can be sure they’re getting screwed in the deal.

The total deficit addition from the American Recovery and Reinvestment Act, as estimated by the Congressional Budget Office, is $814 billion (rather than the $787 billion as initially proposed.) And now it is estimated that the less-than-ideal tax-cuts/unemployment benefits plan will add $270 billion in new stimulus.

Many like that idea, including Ben Bernanke. Many are scared to death of going cold turkey on fiscal spending during a jobless recession in an effort to reduce the US budget deficit. Back to “The Ben Bernank’s” August Jackson Hole speech:

“… strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector. Central bankers alone cannot solve the world’s economic problems.”

And this from a Fed speech of his in November:

“… a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”

And his recent appearance on 60 Minutes suggested that there was a time, in the long-run, to get serious on the budget deficit; that time is just not now.

Now is the time for investors to start fretting about the eventuality of getting strict on the budget deficit, if that ever actually happens, of course. So what about this “collapse in bonds” in response to additional stimulus efforts? One day does not a trend make, right?

Yesterday bonds prices fell sharply, yields surged.

US 10-yr Treasuries (black), 30-yr Bonds (red):

But the price of long bonds has been coming down rather steadily since end of August; 10-year Treasuries didn’t peak until early November, but are falling fast now.

A mere pullback after investors jumped on in anticipation of QE2 buying?

What’s the potential for a sustained rally in yields??

US 10-year T-Note Yield (black) versus 10-yr German Bund Yield (red): Both heading higher; but the US faster lately. Increasingly positive yield differential for the US at this term on the curve…

Is an additional $270 billion of less-than-ideal stimulus enough to solidify growth expectations in the US? Or is this jolt of growth talk going to fizzle out into renewed worries that $270B is not enough and there will be no real change to the unemployment situation and the US will still struggle to break above the important 2.5% growth threshold as set forth by Ben Bernanke as being the point where the US economy can be self-sustaining?

[Breathe …]

A lot of questions, we know.

Ultimately, it’s believed there’s no getting around the eurozone problems without first forcing more political and monetary unity – i.e. a central authority in Brussels and a eurozone-wide bond. But at this point Germany, the arbiter of financial support, is noncompliant.

And right now rising US yields and expectations of an improving growth differential are driving the dollar higher – the rate expectations are thus far a big negative for stocks and risk. Might this be the catalyst that sets in motion an avalanche of worry for investors?

S&P 500 Daily: a reversal bar at a double top …

S&P 500 Weekly: a double top on a double top …

In an odd way, the dollar seems to have a lot of things going for it. But tomorrow is another day. Right now we’re happy with the positions we’re riding …